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Why FireEye, Inc. Shareholders Have Nothing to Worry About

Unlike others in its sector, such asPalo Alto Networks(NYSE: PANW), FireEye(NASDAQ: FEYE) isn't sitting idly by as revenue declines. Last quarter may have been disconcerting to some as sales slowed to the low single digits, and based on CEO Kevin Mandia's guidance for the current quarter, shareholders can expect more of the same.

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However, digging a bit deeper into FireEye's fiscal 2017 first quarter tells a rather compelling turnaround story -- at least the beginning of one. To be sure, FireEye is in the early stages of its relatively drastic change in business model, but the fact that it's already making progress bodes well for the future.

FireEye tried, as many companies do, to put a positive spin on lastquarter's 3% year-over-year increase in revenue to $173.7 million. As noted in its earnings release, and prominently mentioned in FireEye's conference call, first-quarter sales were "above the guidance range of $160 to $166 million."

Investors certainly seemed pleased with beating guidance, pushing FireEye's shareprice up 13% the day following the news announced on May 2. The revelry has continued as FireEye's stock has soared 28% since it shared the news.

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Despite the good tidings, this quarter's guidance of $173 million to $179 million indicates FireEye is expecting another ho-hum quarter; last year it recorded $175.04 millionin sales. Billings also took a hit in the first quarter, dropping 18% to $152.4 million, which is a fairly good indicator of why FireEye doesn't expect much top-line growth anytime soon.

Not much for FireEye shareholders to celebrate, right? Actually, last quarter may not have warranted such lavish kudos from investors, but there were several areas in which FireEye excelled, making it clear that its objective of generating positive operating cash flow by the end of this year is on track.

Walking the walk

It's easy for CEOs to talk about righting the ship: Take Palo Alto, for instance. Though last quarter's $422.6 millionin revenue wasa 26% jump over last year, it was about half of Palo Alto's top-line growth just a few quarters ago. Sky-high spending and "some execution challenges" have also hit the one-time analyst darling's stock hard.

Palo Alto's cost of revenue climbed 20% last quarter to $113.2 million, and operating expenses soared 25% and now sit at $363.8 million. It's not hard to figure out why Palo Alto continues to bleed money with each successive quarter. FireEye, on the other hand, is delivering on its mandate of becoming a leaner, more efficiently run data security provider.

In contrast to Palo Alto, FireEye not only got a handle on spending, it made huge strides in the right direction. Cost of revenue dropped10% to $64.6 million, and that was a mere drop in the bucket relative to FireEye's efforts to shave operating expenses.

Yes, revenue only grew 3% in the first quarter, but thanks in large part to cutting an impressive 29% off its operating overhead, losses before taxes were less than half that of a year ago. The result of FireEye successfully delivering on its objectives was a massive improvement in non-GAAP (excluding one-time items) operating margin. A year ago, FireEye's margin was a woeful negative 44%, and now? Though still in the red, FireEye's operating margin were only negative 7%.

FireEye's positive changes in such a relatively short period of time speaks volumes about Mandia and team, as does the per-share loss of $0.09 this past quarter compared to a negative $0.47 a share in 2016.

The strides FireEye have made are good signs, but even more importantly, the reason long-term investors needn't worry is its management has clearly demonstrated it does a lot more than talk a good game: It delivers.

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